Grow your own commercial property portfolio

If you’ve already bought commercial property and are looking to build your investment portfolio, we have some tips and advice from an expert in the field. A healthy commercial property portfolio is rather like a garden – for consistent growth you need to know when and where to sow, have e...

If you’ve already bought commercial property and are looking to build your investment portfolio, we have some tips and advice from an expert in the field.

A healthy commercial property portfolio is rather like a garden – for consistent growth you need to know when and where to sow, have enough variety to cover all seasons and be prepared to weed out the unproductive. If you’ve already bought commercial property and are looking to build your investment portfolio, here are some tips and advice from an expert in the field.

Be knowledgeable

Stephen Gorman, managing director of Gorman Commercial, says it’s important to learn all you can about the commercial property market so you can make informed decisions.

“Look through listing websites, read articles, start getting used to the terminology, understand what rent means, dollars per square metre, yield, what leases involve. Read the real estate and business sections in the papers to see what’s on offer and what’s happening in the market. There are many useful tools available now for finding information.”

Understand your financial position

One of the fundamental elements in building a healthy portfolio is a solid understanding of your financial position, including:

• Your budget, how much you can spend and what you want/need to get in return.
• How much you can borrow and on what terms.
• How you will manage if the tenant leaves, and for how long.
• The effect of interest-rate movements.
• Contingency plans in case a poorly-performing investment can’t be sold quickly.

Develop relationships

Building an investment portfolio in commercial real estate differs from other asset classes – success comes more from the ongoing management of the asset than from buying and reselling. Gorman says it is crucial to develop a working relationship with a knowledgeable commercial real estate agent.

“Apart from education and knowing your budget and what you want to buy, I think the next most-valuable asset is knowing a commercial real estate agentin

It’s a symbiotic relationship, and it can work well for both agent and investor. The agent wants to manage your properties, keep them tenanted and help maintain their value. In return, he will keep you informed about the market, advise you on purchases and warn you away from potential risks.

“If I know someone’s bought a few properties and they’re looking at building their portfolio, I will happily offer advice in return for the management when they buy. That way, I can help them avoid making mistakes such as buying properties that have high yields because the rents are unreasonable, or the tenants are leaving soon.

“I say to my clients that I want to be looking after them in five to ten years’ time, and if we made a mistake because the world’s changed then that’s fine. But it shouldn’t be because you didn’t get good advice.”

If you don’t have an agent you can trust and feel comfortable with, consider engaging a valuer to ensure the property you’re considering is solid, that the tenants are paying the rent and that you’ll get the return you expect on your capital.

Diversify

“But take care not to buy into a market without understanding its current situation. Ask your advisor, ‘How is retail going right now?’”

Gorman suggests that whatever else is in your portfolio, a fairly safe addition is strata offices with three- to five-year leases in larger buildings that are no more than 20 years old.

Keep sentiment at bay

Commercial real estate is different from buying a home – it comes down to yields, leases and tenancies, so it’s important to do careful due diligence before committing to any purchase.

“Don’t just rock up and buy something because it looks good in the ads. It may not be easy, but you have to assess the tenant as a potential risk. Ask the agent the right questions, such as how long the tenant’s been there, is it a fair market rent, how long would it take me to lease it if they left, and what incentives are there in the market right now?”

Ultimately, the success of your commercial property investment portfolio will depend largely on how much work you do and the relationships you develop with your chosen team of experts. Be prepared to pay for good advice, but remember that their answers will be dependent upon your questions, so the more you know the better they’ll be.